HomeMy WebLinkAbout2001-09-20 City Council (2)City of Palo Alto
Manager’s Report
TO:HONORABLE CITY COUNCIL
ATTN:FINANCE COMMITTEE
FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:SEPTEMBER 20, 2001 CMR: 355:01
SUBJECT: UPDATE TO LONG RANGE FINANCIAL PLAN
REPORT IN BRIEF
Attached to this report is the City’s updated General Fund Long Range Financial Plan
(LRFP). Unlike the update presented in the summer of 2000, this LRFP shows smaller
surpluses and more financial challenges in the "most-like!y" forecast or scenario. This
change is primarily the result of a dramatically changed local and national economy.
Rising unemployment, declining consumer confidence and the waning financial condition
of businesses is beginning to have effect on local revenue sources. In addition, the City is
facing a variety of funding challenges that include providing for retiree medical benefits
and continuing to subsidize storm drain maintenance.
The LRFP provides an overview of the economy, an analysis of the City’s current
revenue and expenditure picture, a variety of forecasts on future financial condition, and
a discussion of future financial issues. In the final chapter, staff provides insight into
existing and potential efforts to raise new revenues for the City for new infrastructure
needs. The burden of such efforts on a resident’s tax bill is then displayed for Council
review as it considers fee and revenue enhancements.
CMR:355:01 Page 1 of 4
RECOMMENDATION
Staff recommends that the Finance Committee review the attached multi-year forecast of
revenues, expenses and projected surpluses for the General Fund and determine any
changes or adjustments in the assumptions utilized in the projections shown and
discussed in Chapter Two.
BACKGROUND
On July 17, 2000 and June 6, 2000, Council reviewed updates to the City’s Long Range
Financial Plan (CMRs 321:00 and 269:00). These updates showed projected surpluses in
the "most-likely" forecasts of $2-3 million annually. Conclusions drawn from the
forecast were:
surpluses were inadequate to support major new project or program initiatives
the City faced long-term financial challenges such as the loss of $4 million in annual
rental income from the Refuse Fund in 2012 and a need to fund the liability for
retiree health care costs
In addition, the updates discussed options to raise $22 million for the Infrastructure Plan
and how to determine the community’s new infrastructure priorities and their willingness
to pay for them.
DISCUSSION
The economic climate has shifted significantly since the last Long Range Financial Plan
(LRFP) was presented in the early summer of 2000. Both locally and nationally,
unemployment rates are rising, corporate profits are plunging, and consumer confidence
has declined. Silicon Valley has been particularly vulnerable to the downturn. This will
create pressures on the sources of revenues vital to the financial health of local
governments.
The attached report presents an updated multi-year forecast for the General Fund with
staff’s best estimates of future revenues and expenses. Discussion focuses on the "most-
likely" scenario, under which the City has smaller surpluses than those shown in prior
year forecasts. Whereas prior LRFP forecasts showed longer term financial challenges,
the current forecast shows more immediate issues. These include, for example, a
continuing Storm Drain subsidy that drains the General Fund; threats to the sales tax base
from slowing consumer spending and business relocations; and potential State actions to
solve upcoming budget dilemmas. These and other challenges show a need for careful
financial planning.
For the purposes of sensitivity testing, pessimistic and optimistic versions of the financial
forecast have been prepared. While staff does not see the results of these forecasts
CMR:355:01 Page 2 of 4
materializing, they are helpful in anticipating potential trends and in developing financial
strategies.
The attached LRFP consists of four chapters:
Chapter 1:
Chapter 2:
Chapter 3:
Chapter 4:
State of the Economy
Long Range Financial Forecast
Financial Challenges
Revenue Enhancements and Impacts on Residents
In addition to graphs and charts presented in the text, a variety of statistics and data
previously requested by Council Members follow Chapter 4.
RESOURCE IMPACT
As with any financial forecast, the fiscal impacts shown are estimates. Estimates of the
resource impacts of furore challenges and of revenue enhancements are provided to guide
policy decisions, but actual impacts are unknown at this time.
POLICY IMPLICATIONS
The implications of the LRFP are that the City is facing potential budget constraints
similar to those in the last recession. The small surpluses shown in the "most-likely"
forecast show little flexibility in meeting unexpected costs and indicate that the City must
analyze its revenues and expenditures carefully and prepare a contingency plan to restrain
expenditures. New revenues will be required to meet any new projects or programs.
These actions are consistent with Council’s policy of maintaining a balanced budget and
Budget Stabilization Reserve requirements.
ENVIRONMENTAL REVIEW
This report on long term financial planning represents preliminary policy assessment and
direction to staff. It does not require California Environmental Quality Act (CEQA)
review.
ATTACHMENTS
Chapter I: State of the Economy
Chapter II: Long Range Financial Forecast
Attachment A
Attachment A - 1
Attachment B
Attachment B - 1
Attachment C
Attachment C - 1
Most-Likely Forecast
Assumptions
Optimistic Forecast
Assumptions
Pessimistic Forecast
Assumptions
CMR:355:01 Page 3 of 4
Chapter III: Financial Challenges
Attachment D Financial and Other Data - Trends
Chapter IV:
Attachment E
Attachment F
Attachment G
Attachment H
Revenue Enhancements and Impacts on Residents
Profile of Taxes on Resident’s Property Tax Bill
Budgeted Employees Per One Thousand Residents
GF Revenues & Expenditures Per Capita in 1999 Constant
Dollars
Major Revenues Per Capita in 1999 Constant Dollars
PREPARED BY:
JOE Deputy Director
Admifii~trative Services
Admin~trative Services
CITY MANAGER APPROVAL:
EMILY HARRIS ON
Assistant City Manager
CMR:355:01 Page 4 of 4
2001
Long Range Financial Plan
Chapter One
LONG RANGE PLAN
CHAPTER ONE:
STATE OF THE ECONOMY
The economy has shifted dramatically since
Council last reviewed the City’s Long Range
Financial Plan on June 6, 2000. Last year the
United States was in the midst of the longest
economic expansion in history. Silicon Valley and
the State of California played a major role in that
expansion as the chief source of productivity
growth from technology advances and of new
businesses fueled by abundant venture capital.
Since January 2001, the economy has sharply
reversed itself, with dramatic drops in corporate
profits, a sagging stock market, significant layoffs,
curtailed consumer spending, and a virtual stand-
still in venture capital funding. As Silicon Valley
led the way into expansion, it also has led the way
into contraction, posing significant challenges for
local government General Fund finances.
Evidence of the economic slowdown is abundant.
While the Bay Area’s unemployment rate was at
an historical low last year, data from the federal
government (table below) show that the local
unemployment rate has risen steadily over the past
six months and is rising more quickly than the
national rate. Employment Development
Department (EDD) confn-ms this trend, revealing
that Santa Clara County’s unemployment rate has
ratcheted up to 4.7 percent in July.
This news is not surprising given the number of
dot.com closures and job cuts in the Bay Area.
According to Webmerger.com, a company that
services the buying and selling of Internet and
technology properties, at least 592 Internet
companies have ceased operations since January
2000. Of these, 367 or 62 percent of the
shutdowns came in the first seven months of 2001.
In addition to these business casualties, larger,
more mature technology companies have
announced sharply lower earnings leading to
forced vacations, salary reductions and layoffs.
Significant job cuts have occurred at firms having
a local presence such as Agilent (4,000), Hewlett
Packard (7,100), Cisco (8,500), Compaq (8,000),
Charles Schwab (6,800), Oracle (900), Siebel
(400), and Sun Microsystems (300). Recent
merger discussions between HP and Compaq will
inevitably lead to further layoffs. In addition,
Region
National
San Francisco!
San Jose*
Jan-01 Feb-01 Mar-01 May~l June-01
Revised
4.5
3.9
4.2
July-01
Prelim
% Change
since Jan.
2001
7.14%
69.57%
176.47%
Source: US Bureau of Labor Statistics
*, Metropolitan Statistical Area
companies
such as Sun
and HP have
instituted
salary reduc-
tions and
mandated
vacations and
holidays to
save money.
1 September 2001
LONG RANGE PLAN
Although many of the layoffs are not local, the
"wealth effect" that drove local consumer
spending to unparalleled levels in 2000 has been
severely undermined by the new economic reality.
The "wealth effect" is an expression describing a
strong sense of financial well-being that comes
with higher stock and home equity values and
leads to increased spending.
To offset the economic slide, the Federal Reserve
has implemented seven interest rate cuts since
January 2001 that total 3.0 percent. Another 0.25
percent reduction in rates is expected in early
October. While it usually takes a year for rate cuts
to affect the economy, several economists have
predicted that this downturn is unlike others and
that the Reserve’s cuts may not stimulate the
economy as intended. The consequences of high
technology inventories, an overbuilt fiber optic
communication system, and high corporate and
individual debt may thwart the need for further
borrowing even at reduced rates. As the New
York Times recently reported (August 26, 2001),
"The cold truth is, when borrowers are up to their
eyebrows in debt, even the most aggressive
interest rate cuts can’t seduce lenders into making
additional, and riskier, loans." Thus, the liquidity
that fueled the economy during its expansion may
not be available to fuel a recovery.
The chief bulwark against the economy falling
into a recession has been consumer spending and
underlying consumer confidence. Consumer
spending is critical to the economy since it
accounts for two-thirds of the Gross Domestic
Product. As one fund manager said recently,
"People have been spending and that has been the
glue holding the economy together" (Reuters,
August 28). Whereas in past economic
slowdowns, low spending by consumers led the
economy into a recession first with business
following, the opposite situation appears to be
occurring in the current environment. Business
has led the current decline while consumers have
continued to purchase goods and services. Unfor-
tunately, consumer support since January appears
to be eroding, potentially undermining hopes for
recovery in the near future.
According to the Conference Board, a private
research firm, its consumer confidence index
dropped unexpectedly in August to 114.3, well
below the July index of 116.3 and much below the
expected August index of 117.0. In fact, the
August index was at its lowest level in four
months. Additional evidence showing a worried
consumer can be found in statistics on consumer
spending growth. In the first quarter of 2001
consumer spending grew at 3 percent (in first
quarter of 2000 it grew at 5.9 percent), while
spending in the second quarter grew at 2.5
percent, a considerable decline.
In addition to consumer data, other economic
trends point to a weakening economy. On July
27, 2001, the US Commerce Department reported
that the inflation-adjusted Gross Domestic
Product (GDP) grew at only a 0.2 percent annual
rate in the second quarter of 2001, the lowest in
eight years. Recent revisions to prior year data
show growth declining earlier than first reported -
with GDP growth dropping below 2% in the third
quarter of 2000 instead of the fourth quarter.
Nonresidential investments declined by almost
12.3 percent since the first quarter of 2001, the
worst drop since 1982. The biggest plunge came
September 2001 2
LONG RAN.GE PLAN
in business spending on equipment and software,
the kinds of products made by Silicon Valley
technology companies. There also was a drop in
offices, factory building and other structures.
Key indicators (see table above) show the
economy slipping in the third quarter. Growth
rates in Gross Domestic Product (GDP) drop
dramatically in the third quarter with anemic
Quarter/Year >
G.D.P.
Personal Consumption Expend.4.90 5.70 4.40 5.70 5.90 3.60
Sross Private Domestic Invest.7.60 -5.80 9.80 17.90 -0.60 19.50
Exports -6.80 4.20 9.70 12.10 9.00 13.50
Imports 8.40 13.30 13.80 10.50 17.10 16.40
r : revised
Source: US DeN of Commerce, BEA August 19, 2001
growth following (two quarters of negative GDP
constitute a recession). The decline in exports and
private investment in the third quarter also shows
a weakening economy.
Economists are divided about the endurance and
magnitude of the economic downturn and are
equally uncertain about the timing of an economic
recovery. A recovery was forecasted for the
second half of 2001, but this projection has given
way to estimates of a recovery in the first or
second half of 2002. There are conflicting forces
that have yet to play out. Tax rebates, lower energy
prices, and lower interest rates could foster
enhanced consumer and business spending in the
future. But mounting layoffs, falling stock prices,
higher personal and corporate debt, and soft
economies in Japan and Europe may counteract
those forces leading the nation, state and county
into a recession.
While some economists foresee a short downturn,
others predict a more severe contraction, one in
which the Bay Area may suffer a more
pronounced malaise. Tom Lieser, of the UCLA
Anderson Forecast, believes that California’s
slowdown will
produce negative
growth in real personal
income and gross state
product for the
4.3e 3.10 3.O0 2.5 remainder of 2001. He
-2.8e -2.3e -12.30 -12.3 predicts that gains in
10.6~.4.o0 -1.20 -12.2 California taxable
13.0~-0.5e -5.o0 -7.7 sales in 2001 will be
the weakest since
1993. Lieser cites the
major downturn in the
information technology industry and the electric
power crisis resulting in significant state debt as
particularly troublesome. He predicts much
weaker growth in jobs through 2002, including a
substantial slowdown in the service sector of the
California economy, and a rising unemployment
rate.
The implications of Lieser’s forecast portend
trouble for revenue sources supporting local
governments. A slowdown in economically
sensitive revenue areas such as sales and Transient
Occupancy taxes means that the City must
monitor these carefully and plan for any shortfalls.
3 September 2001
LONG~ RANGE PLAN
This page is intentionally left blank.
September 2001 4
2001
Long Range Financial Plan
Chapter 2
CHAPTER TWO
LONG RANGE
FINANCIAL FORECAST
LONG RANGE FORECAST
The starting points for the Long Range Financial
Forecast are actual expenditures and revenues for
2000-01 and budgeted expenditures and revenues
for 2001-02. Based on the application of varying
assumptions for years 2002-03 through 2010-11,
three scenarios are
presented for
review. These 130,000include a "most-
likely," an 110,000
optimistic, and a
pessimistic forecast.90,000
StafFs analysis 7o,ooo
principally focuses
on the "most-likely"5o.000
scenario with brief
discussions of the
other scenarios
following toward the end of this chapter.
assessing how City resource streams compare to
City outlays and in preparing for the fiscal
challenges that lie ahead.
As we begin discussing current and future trends,
a picture of past General Fund revenue and
expenditure performance is informative. As the
graph below shows, the City has benefited from
comfortable surpluses (1995-96 through 1999-
00) since the recession in the early 1990s. Such
surpluses will be difficult to maintain in the next
several years.
Total General Fund Revenues and Expenditures ($000)
1990-199~-1992-1993-~994-~995-~996-~997-N98-N99-2000-
91 92 93 94 95 96 97 98 99 O0 01
It is important to note that in the current volatile
and weak economic environment, where even the
most astute forecasters are unsure of what will
happen in the next year, significant uncertainties
surround each of the forecasts. Moreover, this
uncertainty grows as the forecast is extended into
out years. Despite these qualifications,
forecasting is a valuable planning tool in
OVERVIEW OF
MOST LIKELY
FORECAST
The most likely
forecast (See
Attachments A and
A- 1 at end of this
chapter) shows
minor surpluses
over time. In last
June’s forecast,
future surpluses
ranged from $1.5
million to $3 million annually, while those in this
forecast are considerably lower, ranging from
$0.4 million in 2002-03 to $2 million in 2008-09.
This change can be attributed to slowing
revenues, higher salary and benefit costs than
anticipated, and committing an additional $1
million in savings to reviving the City’s infra-
structure. Surpluses in this projection will add to
the Budget Stabilization Reserve, but they are not
adequate to fund major new pro~ams or capital
5 September 2001
LONG RANGE PLAN
projects. The need for new revenue sources to
support new infrastructure, and perhaps to
compensate for slowing or lost revenue in
structure plan
¯Another economic slowdown assumed in
2010-11
10,000
90,000
70,000
50,000
Historic General Fund Revenues, $000
1990-1991-1992-!:793-1:294-1995-~296-!qX:27-1998-1999-
91 92 93 94 95 96 97 98 99 O0
existing sources, appears even more compelling
than in prior years. Some of the chief assump-
tions in this scenario (see Attachment A-1 for all
assumptions) are as follows:
¯The current economic slowdown continues
into 2002-03
¯Revenues such as sales and occupancy taxes
remain relatively flat until 2003-04
¯Salary and benefit costs associated with
recent labor agreements are incorporated
with expected rate of inflation applied in out
years
Among the many challenges the City
faces, one of the most serious is the
erosion of local revenue sources. Since
the last recession that ended around
1993, the City has experienced a huge
surge in sales, transient occupancy,
documentary transfer, and property
taxes. These revenues have supported
the expansion of services as well as the
rehabilitation of capital assets. Threats
to these revenues in the form of slower
consumer spending, deteriorating business condi-
tions, and a weakened State budget pose signif-
icant problems for the City as well as for all local
governments. On the expenditure side, recent city
salary settlements and new public safety
retirement plans will exert continuing cost
pressures.
Before addressing longer-term challenges and
opportunities, it is important to evaluate the City’s
current revenue and expenditure picture.
¯All sources and uses of funds
(including $2.0 million in annual
savings)for the City’s Infrastruc-
ture Management Plan incorpo-
rated
¯ No Budget Amendment Ordi-
nances adding non-recovered
COSTS
¯Interest income declines over time
as a result of drawing down Gen-
eral Fund reserves for the infra-
Major General Fund Revenues $000
i 26,000
21,000 i
~i 16,000 ....
11,000
; 6,000
1,000
1990- 1991- 1992- ~3- 1994- 1995- 1996- 1997- 1998- 1999- 2000-
91 92 93 94 95 96 97 98 99 O0 01
[~Sd~Tcx ~PropertyTcx ~Sv. Fees &Pe-mts--TOT ~Otha’Tcx&Flnes
September 2001 6
LONG RAHGE PLAH
REVENUE ANAL YSIS
As the graph on the prior page depicts, overall
revenues for the City were somewhat flat from
1991 through 1995 and then showed exceptional
growth afterward.
GFRevenues byType- 2001 Actuals (S000)~
Utility Us e~s Tax
6%
J oint S v
T rcrs f~s In
5%
l nt~ t
4%
Oth~ R ~enu~s
Allocated
Scl~s Tax
22% 2%
With few exceptions, major revenue categories
such as sales, property, transient occupancy,
service fees and permits, and other taxes and
fines have moved upward over time.
Unlike other cities, the City of Palo Alto has
been fortunate in having a diverse and balanced
revenue base. As the above pie chart shows,
sources of funds for the City are well-distributed
among several sources.
Revenue diversity benefits the City in that
periodic revenue declines in one category are
typically balanced by growth in another. Unlike
many Cities its size, Palo Alto is not as
dependent on one or two revenue sources.
Moreover, within its largest revenue category,
sales taxes, the City has a wide distribution of
revenues among its economic segments. This
variety buffers downturns in any one sector.
Cities such as Mountain View, which are
heavily dependent on technology sales, face
greater volatility in its sales tax base than
does a city like Palo Alto where sales tax
revenues are more dispersed among
restaurant, department store, auto, and office
equipment sales.
Sales Tax: Actual 2000-01 sales tax receipts
represented 22% of General Fund (GF)
revenues, the largest single source of revenue
to the City. The double-digit growth realized
in the last several years for local sales taxes
has ended. A comparison of locally
generated year-end first quarter revenues
(first quarter of 2001 and prior three quarters
compared to first quarter of 2000 and prior
three quarters) shows a respectable, but less than
stellar $1.4 million or 7.9 percent increase. A
comparison of the first quarters alone (see first
graph next page), however, shows some
disturbing trends that may continue into
upcoming quarters. Of most concern, is that new
auto sales, which have been rising steadily since
the first quarter of 1998, decreased in the first
quarter of 2001. Sales taxes fell by $50,000 or
7.2 percent and were particularly weak in the
high-end auto market. Weakness in auto sales is
of concern because they account for 14 percent
of City sales tax revenues or $2.9 million.
Especially troublesome is the fact that several
7 September 2001
Quarterly Sales Tax Revenues ($000)
7000
sales tax revenues are expected to remain
relatively fiat through 2002-03 with a
recovery beginning in 2003-04.
6000
5O0O
4000
3000
auto dealerships are either moving or consid-
ering moving outside Palo Alto (discussed in
Chapter Three).
The graph below shows statewide new auto
registrations taking a steep drop in May and
June. If this trend continues, sales may fall
below 1999 levels affecting local revenues
further.
Property Tax: Rising to $12.2 million in
i 2000-01, property taxes are the third
largest City revenue source (after sales
taxes and Transfers In) at 11 percent of
total revenues. The significant appreci-
" ation in home and commercial property
’ values in the last several years led to a
13.1 percent increase in 1999-00
revenues over 1998-99 and a 12.4 percent
increase in 2000-01 revenues over 1999-00.
Property taxes are expected to hold at current
revenue levels in 2001-02 with a mild increase.
The economic downturn is anticipated, however,
to curb growth in property values, especially in
California New Auto Registrations
180,000
The economic slowdown has affected other
areas as well. Miscellaneous retail (e.g.
jewelry, books, and kitchen equipment)
receipts have fallen by $55,000 or 10
percent; business services (e.g. advertising,
design, and copying) have declined by
$67,000 or 27 percent; and electronic
equipment (e.g. computers and medical
equipment) have dropped by $20,000 or 9
percent. While sales of expensive items such as
jewelry and autos have been particularly hard
hit, the slowing economy has affected nearly all
sales tax segments. In the "most likely" forecast,
160,000
140,000
120,000
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
~1999 ~2000 --2001 j
the commercial market. According to BT
Commercial Real Estate Reporting, in the
second quarter of 2001, the office market in the
101 Tech Corridor has experienced a sharp
reversal with vacancy rates hitting new highs
compared to a near zero vacancy rate of 0.5% a
September 2001 8
LONG RANGE PLAH
year ago. Early summer information for the
Stanford Research Park indicates a 10 percent
vacancy rate while citywide commercial
vacancy rates are at 4 percent. Reflecting the
number of business closures, this trend will
exert downward pressure on revenues through
15,000
13,000
11,000
9,000
7,000
5,000
3,000
1,000
payments to Palo Alto (to partially offset prior
year property tax shifts to school districts) of
around $125,000 have been suspended because
of State budget difficulties.
Property Tax Revenues ($000)
1990- 199t- D92- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000-
91 92 93 94 95 96 97 98 99 O0 O1
Transient Occupancy Tax: TOT receipts have
been a key revenue source for the City,
coming in at $9.5 million or 8 percent
of total 2000-01 revenues. These
revenues have risen dramatically (see
graph below) during the economic
expansion, growing by 14 percent in
1999-00 and by 27 percent in 2000-01.
Although half of the 2000-01 increase
resulted from the addition of a new
hotel, the remaining increase came
from rate increases and high
real and personal property reassessments and
fewer investments in commercial property.
On the residential side, the State’s Department
of Finance reports that "home sales have slowed
the most dramatically in the San Francisco Bay
area. Sales in San Jose -the Silicon
occupancy rates.
Despite its enviable location, the City is not
immune from the economic slowdown which
did affect TOT receipts in the last quarter of
2000-01. Recent local Travel and Convention
Bureau reports have shown as much as a 25
Valley- fell 27 percent from a year ago,
while home prices were nearly stagnant,
rising a meager 1.1 percent." This
slowing will dampen growth in revenues
in the next few years. Staff does not
anticipate a drop in property taxes unless
the local economy suffers a severe
recession. Future demographic trends
and the demand for housing in Palo Alto
are likely to sustain property values. It
should be noted that State, one-time
10,000
8,000
6,000
4,000
2,000
0
Transient Occupancy Tax ($000)
t990-1991-1992- 1993- 1994- 1995- 1996- 1997- 1998- "~;~9- 2000-
91 92 93 94 95 96 97 98 99 O0 01
9 September 2001
percent decline in business travel in some areas
of the Peninsula. In fact, the City’s occupancy
rates slipped from around 82 percent in the fiscal
fourth quarter of 2000 to 67 percent in the fiscal
fourth quarter of 2001, showing a decline of
around $0.27 million. On an annual basis,
occupancy rates declined from 79 percent to 73
percent. Should this trend continue, an
adjustment to 2001-02 TOT revenues may be
required at midyear. The "most likely" forecast is
based on the adopted budget, with no growth
expected in 2002-03 and moderate growth in out
Utility Users Tax (SO00)
1996-97 1997-98 1998-99 1999-00 2000-01
~ Telephone ~ Utilities
Utility Users Tax (UUT): In 2000-01, UUT
revenues rose by $1.0 million or by nearly 18
percent over 1999-00 receipts of $5.9 million.
This increase reflects an increase of $0.58
million in utility taxes and $0.45 million from
telephone taxes. The higher utility revenue
derives from several, substantial midyear gas
rate increases in 2000-01 and an electric rate
increase at the beginning of 2001-02. These
increases were necessary because of sharply
rising commodity costs for gas and electricity. To
blunt the impact on ratepayers, the City instituted
a UUT rebate program along with an intensive
conservation program. While utility revenues are
expected to increase slightly in 2001-02 as a
result of annualizing 2000-01 mid year rate
increases, they will be curtailed by ratepayer
efforts at conservation. Projections of future
utility tax revenues are based on the Utilities
Department’s long range forecast.
The robust growth in telephone revenues is
believed to result from a rise in non-f’txed
line telephone usage. Growth in this area
has been steady and revenues should be
sustained in the future. A conservative
growth rate of 2 percent per year has been
applied to this category in future years.
Other Taxes, Fines and Penalties: This
category is comprised of the documentary
transfer tax, motor vehicle tax, and fines
such as parking penalties. In the past
several years the documentary transfer
tax has grown dramatically. In 2000-01,
however, it declined.
DOCUMENTARY TRANSFER TAX
The documentary transfer tax is paid at the time
a property changes hands. It responds more
quickly and directly than the property tax to
changes in the economy since it is based on the
volume, mix, and value of property transac-
tions. Receipts in 2000-01 were $0.6 million
lower than those in 1999-00. This is a conse-
September 2001 10
LONG RANGE PLAN
quence of sluggish commercial transactions and
weakening home sales, particularly at the high
end of the market. A reversed "wealth-effect"
has apparently hit this segment of the market, tt
is possible that a midyear adjustment to this
revenue category may be necessary given the
performance in 2000-01 and the current
economic outlook.
MOTOR VEHICLE LICENSE FEE (VLF)
Strong motor vehicle tax revenues have
continued into 2000-01 growing by $0.2 million
compared to 1999-00. This revenue has risen as
a consequence of new autos replacing older
models and as a result of population growth. The
recent decline in automobile sales foreshadows
a leveling of revenues in the near future.
If the State’s budget picture continues to deteri-
orate, a threat to this revenue source could
emerge. The recent rebate of VLF fees to
motorists resulted in the State backfilling local
revenues by using State General Funds. Should
the State shift this burden to localities, an
important revenue source of revenue to the City
would be jeopardized.
FINES AND PENAL TIES
This category consists primarily of parking and
vehicle code violations. These fines rose by $0.2
million in 2000-01compared to 1999-00 levels
as a result of full staffing levels in the Police
Department. Unless staffing vacancies occur or
downtown visits decrease, revenue levels are
expected to rise in 2001-02.
Overall, other taxes, fines and penalties are
expected to remain flat through 2002-03 and rise
modestly in furore years.
Service Fees and Permits: This category
includes planning, building permit, golf course,
paramedic, entry, and class registration fees.
Given the variety of fees, some are more
sensitive to economic changes than others.
Golf course green fees, for example, rose a mere
1.3 percent in 2000-01over 1999-00 levels.
Weakness in this revenue source is anticipated
with the economy declining and the need for
additional improvements that will reduce play
on the course. Program and class fees, on the
other hand, have increased by 11.3 percent since
1999-00 as a result of increased attendance.
Building and plan checking fees show a mixed
picture. While plan checking fees have risen by
$0.4 million or 25.2 percent in 2000-01 over
1999-00 levels, new construction permits have
fallen by $0.2 million or 9.3 percent. Over the
last few years, plan check and review fees have
risen dramatically. Lower construction permit
revenues may bea harbinger of reduced
construction, particularly in the commercial
area. These fees bear careful monitoring given
the possibility of a recession.
Joint Service Agreements: This category
consists of the contract with Stanford University
for fire and communications services. Since the
primary component of this contract is personnel
costs, this category will track closely with actual
11 September 2001
LONG RANGE PLAH
cost increases for salaries and benefits. Based on
recent salary agreements, these revenues are
expected to rise by around 4.5 percent for the next
few years and then rise by the anticipated inflation
rate in out years.
Interest Earnings: The amount of interest
earnings for the General Fund is based on the rate
of return and the General Fund’s share of the
investment portfolio. Although the City’s rate of
return is expected to remain in the 5.6 to 5.9
percent range over the next several years, the
General Fund’s interest income is anticipated to
decline steadily over the next 10 years. By
utilizing the Emergency and Infrastructure
Reserves and lowering the Budget Stabilization
Reserve from 20.0 percent to 18.5 percent of
budgeted expenses to fund the Infrastructure Plan,
reserve levels will decrease and reduce interest
income. As the City spends $10 million annually
to rehabilitate its assets, it is anticipated that
interest earnings will drop by around $100,000
annually.
Other Revenues: This category includes Federal
and State grants, rental revenue from leased facil-
ities, reimbursements from other agencies, and
other miscellaneous revenues. Overall, this area is
expected to be stable at worst and perhaps
increase as a result of the City’s augmented effort
to seek more grants. Other revenues are expected
to grow modestly in future years.
Allocated Charges (Net): This category consists of
overhead charges to the Utilities for legal,
financial, human resource, and other adminis-
trative services. It also consists of charges to other
City funds for such services such as line clearing,
surveying, and communications for the Utility
funds. These charges are then offset by services or
goods provided to the General Fund by other
funds such as mailing and printing, commodity
sales such as electricity and gas, street and traffic
signals, street lights, and vehicle replacement. As
commodity prices have risen the customary
positive balance for the General Fund has
declined to around $0.4 million. It is projected
that this source of funds will continue to be stable
as commodity prices fall over time.
This category also includes general liability
insurance costs and worker’s compensation claim
coverage. The liability reserve is re-evaluated
each year based on an actuarial study. Liability
charges can change substantially from year to
year based on the study. Since these swings are
difficult to predict, the model assumes steady
growth.
Operating Transfers: This source of funds
consists of reimbursement for services provided
by General Fund staff (e.g. CDBG funds for
administrative support and Gas Tax Funds for
Public Works administration of street improve-
ments); rents charged to the utility funds; and
equity transfers from the Electric, Gas, and Water
funds. The rent and equity transfer components of
the transfers is incorporated in the model at a 3
percent growth rate. This growth is based on a
temporary, policy decision to alleviate rates
charged to customers in the volatile commodity
markets and the financial condition of each fund.
It is important to note, however, that rent and
equity transfers ($16.1 million) represent a critical
September 2001 12
LONG RANGE PLAN
source of support and growth for the General
Fund. By revisiting the temporary 3 percent cap
policy for the Electric and Gas funds, the City may
have more flexibility in addressing finance future
needs.
EXPENDITURE ANALYSIS
As background to the discussion below, a picture
of how the City’s
General Fund expen-
ditures are allocated is
presented in the pie
chart to the right. As
in any service
industry, salary and
benefits represent the
largest share of
expenditures at 60
lower salary growth. No new positions are
included in the projection for future years beyond
2002-03.
For each I percent change in General Fund
salaries, ongoing expenses rise by over $820,000.
To accommodate this growth, sales taxes would
have to rise by 3.3 percent or TOT would need to
increase by 8.7
Expenditures by Category 2001 Actuals !
Expense
8%
While the City can
attempt to curb
supplies and
materials, general, and contract expenses to
achieve savings, any need for major saving efforts
must come from salaries. This will take a more
concerted and painful effort since it would involve
program and service reductions.
Salaries and Benefits: Recently agreed upon
salary and benefit increases have been factored
into the model through 2002-03. Salary growth is
assumed to grow by 3 percent in 2003-04 and 4
percent thereafter in the "most likely" scenario.
The 3 percent rate is predicated on the assumption
of a slow economy in 2002-03 that may result in
percent. Such growth
rates in these taxes
have been realized in
the last several years,
but at this point in
time they appear
unlikely through
2002-03. It is recom-
mended that the City
carefully evaluate the
addition of any new
FTE or, at a
minimum, establish
cost recovery
programs for incremental staffing. In addition,
future salary and benefit increases need to be
evaluated within the context of revenue growth
and other expense challenges.
Two of the key components of benefit costs are
retirement and health care (health, vision, and
dental). The City has recently negotiated with
public safety personnel retirement plans that
include 3 percent pay for each year of service
upon reaching 50 years of age. These agreements
add approximately $1.9 million in ongoing costs.
Based on somewhat conservative estimates that
have been used to budget Public Employment
13 September 2001
LONG RANGE PLAN
Retirement System (PERS) expenses in the past,
the City has some flexibility in covering these
new retirement plans in the near future. The result
of these plans, however, is that funds of around
$3.0 million the City has been saving toward the
unfunded liability for retiree medical premiums
will be reduced to around $1.0 million.
To date the City has saved $11 million from prior
years toward the retirement medical liability.
Based on a recent and preliminary actuarial
analysis, the City’s liability could be as high as
$65 million. A prior year calculation placed the
medical premium liability at $40.9 million. The
time frame for funding this liability is the respon-
sibility of individual cities at this time. Assuming
a liability of $65 million, $11 million in a liability
fund, $1 million in annual benefit savings, and a
plan to fund the liability over 40 years, staff
estimates, at this time, that the City must generate
additional annual savings of nearly $0.4 million to
cover its retiree medical liability.
As mentioned, the City has budgeted its PERS
rates conservatively, creating flexibility to cover
unexpected benefit costs such as higher workers
compensation and general liability expenses,
overages in overtime expense, and to cover retiree
medical benefits. This approach has been viable
as long as PERS did not raise its rates signifi-
cantly. Should PERS raise rates as a result of poor
portfolio yields or other factors, City benefit
expenses will rise and alternative funding
solutions may be required.
Industry trends point toward significnt growth in
health care costs in the near future. An overall
increase in health carecosts of 25 percent has
been included in the budget for 2001-02 and is
carried forward with inflation factors similar to
those for salaries. It is anticipated that vision and
dental costs will grow by about 10 percent
annually for the next two years and 5 percent a
year thereafter.
Non-Salary Expenses: This category includes, for
example, supplies and materials, service
contracts, utility, PAUSD payments, minor
equipment and other miscellaneous costs. A
growth rate of around 2 percent is incorporated in
this model. In prior years, a contingency of
around $1.0 million for Budget Amendment
Ordinances (BAOs) was included in the forecast.
The "most likely" forecast presented in this report
does not include any funds for BAOs. It is prudent
to keep changes to the 2001-02 Adopted Budget
at an absolute minimum given the challenging
revenue environment and to achieve savings for
infrastructure and other liabilities. This will
necessitate disciplined spending on the part of
City departments and Council.
Transfers Out: Two categories of operating
transfers out are displayed in the forecast. The
first is a transfer to the Infrastructure Reserve.
This consists of $2.0 million in expected savings
and $0.8 million in anticipated TOT revenues
dedicated to the Infrastructure Plan. By incorpo-
rating these transfers into the forecast, the
commitment to the "$22 million solution" is
firmly incorporated in the Long Range Plan. In
other words, the net surplus/deficit takes into
September 2001 14
LONG RANGE PLAH
account $2.8 million in savings and revenue
earmarked for the infrastructure program. The
second category of transfers consists of transfers
to the Capital Improvement and Storm Drain
funds. The former is to fund the General Fund’s
(GF) capital improvements (including infra-
structure) and the latter is the GF support for storm
drain operations which now costs around $1.0
million.
As mentioned, the surpluses shown for the GF
over the next 10 years range from $0.4 to $2.2
million. To achieve these surpluses and to
minimize further erosion in the City’s "bottom
line," City management will implement programs
to control costs. These efforts, which are being
developed, will be discussed during the LRFP
presentation to the Finance Committee.
SENSITIVITY TESTING
In order to understand the sensitivity of the long
range plan to the varying effects of the economy,
staff prepared two additional forecasts: an
optimistic projection and a pessimistic projection.
Except for a downturn in the economy assumed
for 2010-11, these scenarios do not incorporate
any future one-time or ongoing major impacts
such as a permanent revenue reduction by the
State. Instead, the forecasts simply include
changes in the growth factors to reflect positive or
negative trends in base revenues and expenditures.
OPTIMISTIC SCENARIO
Under the optimistic scenario (See Attachments B
and B-1 at the end of this chapter), the economy
begins to improve toward the end of 2001-02 and
recovers in 2002-03. It assumes that the Federal
Reserve’s interest rate cuts take effect and that
businesses become profitable in the near future. In
addition, it assumes that the technology sector
rebounds, fostering local jobs and consumer
spending that will fuel growth in City revenues.
Major revenue sources such as sales taxes and
TOT receipts are expected to rise by around 3
percent in 2002-03 and continue rising by around
4 percent in future years. Similar growth in
property and documentary transfer taxes is not
expected until 2002-03 since the growth of these
receipts tends to lag behind the growth of other
revenue sources.
In this scenario, the City will experience increased
pressures on costs. Unless there is a surge in
productivity as in the last economic expansion,
inflation pressures are likely to rise with a higher
level of economic activity. The City will
experience pressure to keep key operating costs
such as salaries and benefits and contracts in line
with inflation. These costs are estimated to grow
by 4 percent in out years.
The optimistic scenario shows a range of surpluses
from $0.6 million in 2001-02 to a high of $4.3
million in 2008-09. At that point, a slowdown in
the economy is assumed with the surplus
shrinking to $2.7 million in 2010-11. This
forecast’s results are more in line with surpluses
realized by the General Fund since 1995. These
levels would allow for higher contributions to
retiree medical benefits and possibly for other
15 September 2001
LONG RANGE PLAN
contingencies such as higher PERS rates or the
need to replenish the Infrastructure Reserve in the
year 2009-10.
PESSIMISTIC SCENARIO
Staff also prepared a pessimistic forecast (see
Attachments C and C- 1 at the end of this chapter)
by showing significant declines in sales and TOT
receipts in 2001-02 and a delay in the economy’s
recovery until 2003-04. A slower recovery would
have a decidedly negative impact, perhaps forcing
severe budget reductions. In addition, other
revenue categories show little to no growth over
the next 3 years.
In this scenario, it is assumed that the Federal
Reserve’s interest rate cuts have little effect on the
economy and that businesses are unable to return
to profitability in the near future. This projection
includes rising unemployment, continued
weakness in the consumer sector, and an actual
recession.
The pessimistic scenario shows deficits beginning
in this fiscal year and through 2010 unless there is
a cost reduction program or a more rapid
economic turnaround than assumed. Projected
deficits range from $2.8 million in 2001-02 to
nearly $10 million in 2010-11. While this
scenario is most unlikely given the City’s
emphasis on fiscal responsibility, the possibility
of a downturn in revenues warrants careful
planning to maintain a balanced budget.
CONCLUSION
The Long Range Forecast shows that the City is
facing a difficult economic milieu. When the
challenges described in Chapter Three are
presented, the tests to the City’s financial resolve
will become more apparent. The "most-likely"
forecast does not provide sizeable surpluses. In
addition to highlighting the need to find alter-
native revenue sources to meet new project and
program needs, the "most-likely" scenario
suggests the need to constrain expenditures.
September 2001 16
LONG RANGE PLAN
Attachment A CiTY OF PALO ALTO LONG RANGE FINANCIAL PLAN
General Fund ($000)
A. LFR - MOST LIKELY SCENARIO
Revenues
Sales Taxes
Property Taxes
Utility User Tax
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Actual Aaopte¢ Modified
25,768 25,602 26,000 26,780 27,851 28,965 30,124 31,630 33,212 34,540 35,576
12,110 12,236 12,981 13,240 13,638 14,183 14,751 15,34!15,954 16,592 16,924
6,738 7,024 7,541 7,720 8,200 8,339 8,723 8,670 8,771 8,875 8,982
Transient Occupancy 9,459 10,300 10,300 10,764 11,302 11,867 12,460 13,083 13,737 14,287 14,572
Other Taxes, Fines &
Penalties 8,915 9,319 9,319 9,599 9,983 10,382 10,797 11,229 11,678 12,028 12,269
Subtotal: Taxes 62,990 64,481 66,141 68,103 70,974 73,736 76,855 79,953 83,352 86,322 88,323
Service Fees &
Agreements
(Stanford University)
Interest Earnings
Other revenues
Allocated Charges
Total Revenues
12,628 13,119 13,381 13,783 14,334 14,907 15,504 15,814 16,130 16,453 16,782
5,505 5,470 5,634 5,803 6,035 6,277 6,528 6,789 7,060 7,343 7,637
4,208 4,162 4,098 4,021 3,943 3,864 3,785 3,705 3,624 3,542 3,459
4,227 3,872 4,493 4,628 4,813 5,005 5,206 5,362 5,523 5,633 5,746
1,993 415 400 412 424 437 450 464 478 492 507
28,561 27,038 28,006 28,647 29,549 30,490 31,473 32,134 32,815 33,463 34,131
Plus Transfer from
Infrastructure Reserve 1,691 5,310 5,900 5,907 5,915 5,925 5,935 5,946 5,959 5,973 5,989
Plus Operating 22,216 21,634 22,093 22,756 23,438 24,142 24,866 25,612 26,380 27,172 27,987
TOTAL SOURCE OF 115,458 118,463 122,140 125,413 129,876 134,293 139,129 143,645 148,506 152,930 156,430
Expenditures
Salaries & Benefits
Contract Services
Supplies & Materials
General Expense
Rents, Leases, &
Equipment
68,841 76,871 81,671 84,121 87,486 90,986 94,625 98,410 102,346 106,440 109,633
11,834 11,47!11,335 11,562 11,793 12,029 12,269 12,392 12,516 12,766 13,022
3,408 3,456 3,461 3,530 3,601 3,673 3,746 3,784 3,822 3,898 3,976
8,818 9,219 9,128 9,311 9,497 9,687 9,880 9,979 10,079 10,781 10,486
9,654 1,174 1,260 1,285 1,311 1,337 1,350 1,364 1,391 1,419 1,447
Department Savings"0 0 0 0 0 0 0 0 0 0 0
TotalExpenditures 102,555 102,191 106,855 109,809 113,688 117,712 121,870 125,929 130,154 135,304 138,564
Plus Transfer to
Infrastructure Reserve 1,832 2,816 3,119 3,175 3,234 3,295 3,360 3,428 3,500 3,575 3,653
Plus Operating
Transfers Out !0,012 12,894 11,781 11,711 11,945 12,184 12,427 12,552 12,677 12,931 13,189
TOTALUSEOF 114,399 117,901 121,755 124,695 128,867 133,191 137,657 141,909 146,331 151,810 155,407
Net Operating 1,059 562 385 718 1,009 1,102 1,472 1,736 2,175 1,120 1,023
17 September 2001
LONG RANGE PLAN
Attachment A - 1
ASSUMPTIONS FOR LONG RANGE FINANCIAL PLAN
Most LIKELY Scenario
The current economic slowdown impacts City’s major source of revenues as consumers and
businesses curtail spending. However, the slowdown is moderate.
Retail sales and business activities are expected to slow during fiscal 2001-02 and 2002-03
but recover in 2003-04.
Property value and transfers maintain a slow but steady growth, as do permits and
construction activities.
¯Business travel moderates, City TOT revenues decline somewhat
¯The growth of City revenues moderates while City expenditures remain constant or increase
¯Near term assumptions:
Sales Tax Declines by 1.55% from 2000-01. Begins to recovers in 2003-04
Property Tax
Utility Users Tax
TOT
Inflation
Other Taxes
Service Fees
Joint Services
Interest Income
Other
2%, moderate growth
Based on Utilities’ most recent forecast
No new growth in 2001-02. Recovery begins in 2003-04
Bay Area inflation slows, to 3-4% per year
Grow at expected rate of inflation
Restrained growth in the near term
Growth with the cost of personnel
Interest rate is down and earnings are further adjusted for
decline in reserve amounts
3-4% growth
Equity Transfer 3% growth
Salaries For 2001-03, as budgeted
Benefits For 2001-03, as budgeted
PERS Based on five-year average
Other Expenses 3% annual growth
Utility Charges Based on ten year forecast
Transfers Based on Infrastructure Plan
September 2001 18
LONG RANGE PLAH
Attachment B
B, LFR (High)Optimistic
CiTY OF PALO ALTO LONG RANGE FINANCIAL PLAN
General Fund ($000)
Revenues
Sales Taxes
Property Taxes
Utility User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Actual ~doptedDptimistic
25,768 25,602 26,370 27,425 28,796 30,236 31,748 33,335 35,002 36,052 37,133
12,110 12,236 12,981 13,241 13,638 14,183 14,751 15,341 15,801 16,117 16,439
6,738 7,024 7,541 7,720 8,200 8,339 8,723 8,670 8,771 8,875 8,982
9,459 10,300 10,712 11,194 11,754 12,341 12,959 13,606 14,287 14,715 15,157
8,915 9,319 9,505 9,791 10,182 10,589 11,013 11,454 11,912 12,269 12,637
Subtotal: Taxes
Service Fees & Permits
Joint Service Agreements
(Stanford University)
Interest Earnings
Other revenues
Allocated Charges (Net)
Total Revenues
Plus Transfer from Infrastructure
Reserve
Plus Operating Transfers In
62,990 64,481 67,109 69,371 72,570 75,688 79,194 82,406 85,773 88,028 90,348
12,628 13,119 13,341 13,741 14,291 14,863 15,457 16,075 16,718 17,053 17,564
5,505 5,470 5,744 5,916 6,152 6,399 6,654 6,921 7,197 7,485 7,785
4,208 4,162 4,194 4,214 4,222 4,231 4,240 4,249 4,258 4,268 4,278
4,227 3,872 4,493 4,628 4,813 5,005 5,206 5,414 5,630 5,799 6,031
1,993 415 400 412 424 437 450 464 478 492 507
28,561 27,038 28,172 28,911 29,902 30,935 32,007 33,123 34,281 35,097 36,165
1,691 5,310 5,900 5,907 5,915 5,925 5,935 5,946 5,959 5,973 5,989
22,216 21,634 22,093 22,535 22,986 23,445 23,914 24,392 24,880 25,378 25,885
115,458 118,463 123,274 126,724 131,373 135,993 141,050 145,867 150,893 154,476 158,387TOTAL SOURCE OF FUNDS
Expenditures
Salaries & Benefits
Contract Services
Supplies & Materials
General Expense
Rents, Leases, & Equipment
68,841 76,871 81,671 84,121 87,486 90,986 94,625 98,410 102,346 106,440 109,633
11,834 11,471 11,335 11,562 11,793 !2,029 12,269 12,392 12,516 12,766 13,022
3,408 3,456 3,461 3,530 3,601 3,673 3,746 3,784 3,822 3,898 3,976
8,818 9,219 9,128 9,311 9,497 9,687 9,880 9,979 1&079 10,281 10,486
9,654 1,174 1,260 1,285 1,311 1,337 1,364 1,378 1,391 1,419 1,447
Total Expenditures 102,555 102,191 106,855 109,809 113,688 117,712 121,884 125,943 130,154 134,804 138,564
Plus Transfer to Infrastructure
Reserve
Plus Operating Transfers Out
1,832 2,816 3,119 3,175 3,234 3,295 3,360 3,428 3,500 3,575 3,653
10,012 12,894 11,781 11,711 11,945 12,184 12,427 12,676 12,929 13,188 13,452
TOTAL USE OF FUNDS 114,399 117,901 121,755 124,695 128,867 133,191 137,671 142,047 146,583 151,567 155,669
Net Operating Surplus/(Deficit) 1,059 562 1,519 2,029 2,506 2,802 3,379 3,820 4,310 2,909 2,718
19 September 2001
Attachment B - 1
ASSUMPTIONS FOR LONG RANGE FINANCIAL PLAN
OPTIMISTIC Scenario
The economic downturn reverses itself toward the latter part of fiscal 2001-02 and begins to
recover in FY 2002-03.
As the economy recovers, major revenues such as sales tax, property tax and transient
occupancy tax start to grow as well.
Transfer from Infrastructure Reserve to the General Fund increases for the implementation of
the ten-year plan.
General Fund contributions to the Infrastructure Reserve Fund include encumbrance and
other savings and also from growth in revenues from Westin, Cabana Hotels and the Sand
Hill project.
Near term assumptions:
Sales Tax
Property Tax
Utility Users Tax
TOT
Inflation
Other Taxes
Service Fees
Joint Services
Interest Income
Other
Equity Transfer
Salaries
Benefits
PERS
Other Expenses
Utility Charges
Transfers
Recovers and grows by 3% in 2002-03
Lags in recovery, picks up momentum in 2003-4, by 3-4%
Based on Utilities’ most recent forecast
Down turn is mild, increases by 4% in 2002-03
Bay Area inflation slows, to 3-4% per year.
Grow at the rate of inflation
Reflects the increased activities, 3 to 4%
Reflects the personnel cost increases of 5%
City is able to obtain favorable investment rates, but total is
adjusted for decline in reserve amounts
3-4% growth
3% growth
Cost contained to 3-4%
Stable increases
Based on five-year average
2% annual growth
Based on ten year forecast
Based on Infrastructure Plan.
September 2001 20
LONG RANGE PLAN
Attachment C CITY OF PALO ALTO LONG RANGE FINANCIAL PLAN
General Fund ($000)
C. LFR (Low) - PESSIMISTIC SCENARIO
Revenues
Sales Taxes
Properly Taxes
Utility User Tax
Transient Occupancy Tax
Other Taxes, Fines & Penalties
Subtotal: Taxes
Service Fees & Permits
Joint Service Agreements
(Stanford University)
Interest Earnings
Other revenues
Allocated Charges (Net)
Total Revenues
Plus Transfer from
Infrastructure Reserve
Plus Operating Transfers In
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Actual W/Pessimistic Assumptions
25,768 24,480 24,480 25,214 26,475 27,798 29,188 30,648 32,180 33,146 34,471
12,110 12,352 12,900 13,184 13,474 13,878 14,294 14,723 14,723 15,018 15,318
6,738 7,297 7,541 7,720 8,200 8,339 8,723 8,670 8,771 8,875 8,982
9,459 8,513 8,513 8,768 9,207 9,667 10,15t 10,658 11,191 11,639 11,988
8,915 8,915 8,915 9,182 9,458 9,742 10,034 10,335 10,645 10,858 11,075
62,990 61,557 62,349 64,068 66,814 69,424 72,390 75,034 77,510 79,536 81,834
12,628 12,628 12,628 13,007 13,397 13,799 14,213 14,497 14,787 15,231 15,688
5,505 5,470 5,634 5,859 6,094 6,338 6,591 6,855 7,129 7,414 7,711
4,208 4,162 4,098 4,021 3,943 3,864 3,785 3,705 3,624 3,542 3,459
4,227 3,872 4,493 4~628 4,767 4,910 5,057 5,158 5,261 5,419 5,582
1,993 415 400 412 424 437 450 464 478 492 507
28,561 26,547 27,253 27,927 28,625 29,348 30,096 30,679 31,279 32,098 32,947
1,691 5,310 5,900 5,907 5,915 5,925 5,935 5,946 5,959 5,973 5,989
22,216 21,634 22,093 22,756 23,438 24,142 24,866 25,612 26,380 27,172 27,987
TOTAL SOURCE OF FUNDS 115,458 115,048 117,595 120,658 124,792 128,839 133,287 137,271 141,128 144,779 148,757
Expenditures
Salaries & Benefits
Contract Services
Supplies & Materials
General Expense
Rents, Leases, & Equipment
Department Savings*
Total Expenditures
68,841 76,871 81,671 84,938 88,336 91,869 95,544 99,366 103,340 107,474 111,772
!1,834 11,471 11,335 !1,562 11,793 12,029 12,269 12,5!5 12,765 13,020 13,281
3,408 3,456 3,461 3,530 3,601 3,673 3,746 3,821 3,898 3,976 4,055
8,818 9,219 9,128 9,311 9,497 9,687 9,880 10,078 10,280 10,485 10,695
9,654 1,174 1,260 1,285 1,311 1,337 1,364 1,391 1,419 1,447 1,476
0 0 0 0 0 0 0 0 0 0 0
102,555 102,191 106,855 110,626 114,538 118,595 122,803 127,171 131,702 136,402 141,279
Plus Transfer to Infrastructure
Reserve
Plus Operating Transfers Out
TOTAL USE OF FUNDS
Net Operating Surplus/(Deficit)
1,832 2,816 3,119 3,175 3,234 3,295 3,360 3,428 3,500 3,575 3,653
10,012 12,894 11,781 11,711 11,945 12,184 12,427 12,676 12,929 13,188 13,452
114,399 117,901 121,755 125,512 129,717 134,074 138,590 143,275 148,131 153,166 158,384
1,059 (2,853)(4,160)(4,854)(4,925)(5,235)(5,303)(6,004)(7,003)(8,387)(9,627)
21 September 2001
LONG RANGE PLAN
Attachment C - 1
ASS~IONS FOR LONG RANGE FINANCIAL PLAN
PESSIMISTIC Scenario
The current economy slowdown impacts City’s major source of revenues as consumers and
businesses curtail spending
Retail sales decline and more store/business closures occur.
¯Property value increase slows; permit, construction slows
¯Business travel suffers significant declines, City TOT revenue declines
¯Economy does not recover until 2003-04
¯The growth of City revenues is curtailed while City expenditures will remain constant or
increase
Near term assumptions:
Sales Tax Declines by 5% from 2000-01. Begins to recover in 2003-04
Property Tax
Utility Users Tax
TOT
Inflation
Other Taxes
Service Fees
Joint Services
Interest Income
Other
2%
Based on Utilities’ most recent forecast .
Declines by 10% in 2001-02. Recovery begins in 2003-04
Bay Area inflation slows, to 3-4% per year.
No growth in the near term
No growth in the near term
Lags in obtaining increase
Interest rate is down, and earnings is further adjusted for decline
in reserve amounts
3-4% growth
Equity Transfer 3% growth
Salaries Cost increases by 4% per year
Benefits Potential upward pressure
PERS Based on five-year average
Other Expenses 3% annual growth
Utility Charges Based on ten year forecast
Transfers Based on Infrastructure Plan.
September 2001 22
2001
Long Range Financial Plan
Chapter 3
CHAPTER THREE
FINANCIAL CHALLENGES
A considerable number of financial challenges,
real and potential, face the City. Given the current
state of the economy and the projection of modest
surpluses in the "most-likely" forecast, it is
necessary for the City to plan for these events.
RE~REMENT COSTS
As mentioned, the City has traditionally conser-
vatively budgeted retirement costs. Savings from
this approach have been used to fund the retiree
medical liability and now will be used to cover the
3 percent pay for each year of service at age 50
plans for public safety employees. These new
retirement plans are expected to cost $1.9 million
annually. Rates charged by PERS to participants
are based on numerous factors including the return
on the PERS portfolio. If the rate of return on the
PERS portfolio were to drop precipitously, a
possibility given recent stock market performance,
PERS may be forced to dramatically increase
rates. Such an action would have a negative
financial impact on the City.
STORM DRAIN SUBSIDY
Although the storm drain subsidy of $1 million is
factored into the forecasts, it represents a major
draw on GF resources and reduces flexibility in
addressing other challenges such as the retiree
medical liability. The subsidy for storm drain
maintenance work will rise in tandem with salary
and benefit increases over time. For a 3 percent
salary increase, the General Fund’s subsidy must
climb by nearly $270,000. In addition, the current
subsidy and storm drain budget does not include
funding for needed capital improvements. As a
consequence of voter rejection of the 2001 storm
drain fee proposal, all incremental costs will be
borne by the General Fund.
City staff members are in the process of devel-
oping a plan to address the storm drain subsidy. In
his next series of discussions with the community
about new infrastructure priorities (December
2001), the City Manager will discuss a variety of
options with residents.
F~OTENTIAL STATE ACTIONS
During its last budget crisis, the State solved its
funding gap by reallocating and thereby reducing
local revenues. The most prominent example of
such action was the ERAF shift of property taxes
from the City to school districts. This shift has
cost the City more than $20 million since it began
in 1992-93. Other examples of revenue taken by
the State include booking fees, cigarette tax
revenue, and vehicle citation fees. With the State
using its $12 billion to $13 billion budget surplus
on the energy crisis and with decreasing income
and sales tax revenues, staff is concerned about
potential State takeaways.
The recent rebate of Vehicle License Fees (VLF)
is a likely target for action. The State is currently
back-filling the rebate with its General Fund
monies. The rebate for drivers is 67.5 percent. If
the State stopped back-filling and continued with
the rebate program at the 67.5 percent level, thus
passing through the rebate at the City’s expense, it
23 September 2001
LONG RANGE PLAN
is estimated the City could lose a maximum of
$2.2 million of the $3.2 million VLF revenues it
receives annually.
Other, less likely threats to the City’s revenue
sources have emerged in Sacramento. In order to
distribute resources more "equitably" throughout
California, there have been proposals to redis-
tribute sales and property taxes based on
population. One such bill, SB2000, would have
had the effect of reducing the City’s sales tax base
by $1.0 million and allocating 41 percent of sales
tax growth to other jurisdictions. Efforts to redis-
tribute resources based on population work
against the City’s financial interests.
LIBRARY PLAN
The City is in the process of determining a range
of costs for library improvements to the
Children’s, Mitchell Park Library, and Main
libraries. Depending upon the extent of:
expanding these facilities; including other facil-
ities in the plan; the need for underground
parking; and a variety of other factors; costs could
range from a minimum of $40 million to over
$100 million. These capital costs donot include
the incremental staffing and material needs
associated with expanding the libraries. These
incremental, annual costs have been estimated at
around $2 million per year.
Consistent with the policy that new or expanded
infrastructure improvements require new funding
sources, a citywide parcel tax is being discussed.
This tax is a prerequisite to any physical and
operational improvements to the libraries given
the magnitude of potential costs. As the "most-
likely" forecast shows there is no room in the
operating budget to accommodate the debt service
or operating costs associated with the library
project. The potential impact of a parcel tax on
property owners is explored in Chapter 4.
BUSINESS REL OCA TIONS AND CONVERSIONS
The City is currently facing the exodus of
businesses generating substantial sales taxes. In
general, automobile dealerships in the region and
nation are searching for sites that offer high
visibility and easy accessibility along major
highways. They also are looking for considerable
storage space to accommodate high sales volume.
The City has learned that one major tax generator
will be relocating from Embarcadero Road to
Redwood City and that another is investigating
potential new sites. Auto sales taxes are a major
component of sales tax revenues in Palo Alto,
generating between $2.5 and $3.0 million per
year. The exit of dealerships would add to revenue
losses suffered from the conversion of retail space
to office space and the departure of technology
firms such as Computerware and Sun Micro-
systems.
Somewhat offsetting this negative trend is the
expected Stanford Shopping Center’s expansion
and the overall attractiveness of Palo Alto as a
place to do business and enjoy downtown shops
and restaurants. Efforts to attract and maintain
sales tax generators are important if the City is to
retain its high sales tax base.
September 2001 24
NEW INFRASTRUCTURE AND OTHER PROJECTS
The City has numerous, new infrastructure
projects that are being considered and for which
funding has yet to be identified. Some of these
projects include:
¯turning newly acquired SOFA land into a park
at an estimated construction cost of $1.6 mil-
lion
renovating the Roth building with costs rang-
ing from $5.4 million to $14.3 million depend-
ing upon the type of work completed
building an expanded police facility at an esti-
mated cost of $31 million to $38 million
major traffic calming efforts estimated at
$14.8 million
¯ finalizing the Greer Park Master Plan esti-
mated at $1.5 million.
In addition to new infrastructure projects, there
are other plans that may impact City finances.
These include, for example, providing affordable
housing, promoting sustainability, and modern-
izing the City’s computer systems and programs.
It is apparent that the City has a plethora of
financial hurdles ahead. The next chapter focuses
on several revenue enhancements that would aid
in meeting those challenges.
RETIREE MEDICAL PREMIUMS
As discussed above, the City faces a potential $65
million liability over the next 40 years for future
retiree medical benefits. Having funded only $11
million of the total liability and with diminished
savings as a result of the 3 percent pay for each
year of service at age 50 agreements with public
safety personnel, the City is faced with a funding
gap to fill over time. While there is no immediate
need or current mandate to fund the liability, it is
prudent to initiate a program that does. The "most-
likely" forecast, with its modest surpluses, does
not show much elasticity in funding this liability.
REFUSE FUND
The LRFP does not include elimination of the rent
paid by the Refuse Fund for the landfill space that
will be closed in the near future. Because of a
planned redistribution of the GF rental payment
over a longer number of years, the City will
continue to receive approximately $4 million in
rent through 2011-12. In 2012-13, however, the
rent payment is expected to be terminated leaving
a substantial hole in GF resources. This loss will
present a major shortfall in resources that will
require advanced budget planning.
INTERNET TRANSACTIONS
Another well-publicized threat to the City’s sales
tax base comes from the Internet. It is roughly
estimated that the City currently loses around $.3
million to $.5 million by not being able to collect
taxes on Internet transactions. As use of the
Internet for business transactions increases, City
sales tax revenues will erode further. State
governors have been unsuccessful to date in
negotiating a solution to this dilemma at the
Federal level.
25 September 2001
LONG RANGE PLAH
SOCIAL SECURITY
As reported in last year’s LRFP, the Federal government is considering requiring newly hired public
employees and their employers to participate in the Social Security program. This proposal, though
dormant at this time, means that newly hired employees and the City would be required to pay 6.2
percent of salaries into the Social Security fund. As stress on the Social Security Trust Fund builds with
dwindling budget surpluses, efforts on the above proposal may become more pronounced. Implemen-
tation of such a plan would place additional expenditure pressures on the City.
September 2001 26
LONG RANGE PLAN
Attachment D
Per Capita Revenue
Per Capita Expenditures
Sales Tax Revenue
Employee per Capita
Discretionary Fund Balances
Long Tem Debt
Decrease or Flat
Increase
Decrease
Increase
Decrease
Increase
Revenues increased steadily in the 1990’s, reflecting strong
economic growth. But revenues are expected to decrease
given the cuurent economic slowdown. Worth monitoring.
Personnel expenditures increased significantly in 2001 to
support the Infrastructure Management Plan, Information
Technology, Children’s Theatre, Library staffing, and Capital
projects. Non-departmental expenditures have also increased
due to the lease payment to PAUSD.
Sales tax receipts fluctuated between increases and
decreases. In constant dollars strong growth in 2000 and
2001. This revenue source could decline due to economic
contraction.
Stable with minor increases
Based on "$22 Million Solution" Budget Stabilization Reserve
has been reduced from 20% to 18.5% of total operating
budget. In addition, GF Emergency Reserve has been
transferred to Infrastructure Reserve.
City’s direct debt gradually decreased from 1995 to 1998. In
1999, the City’s GO bond obligations increased by $6.7 million
due to bond financing for the Golf Course improvements. No
new debt planned for the near future.
Population
Assessed Value
Increase/Decrease
Decrease
Palo Alto’s population stays fairly stable with minor changes.
Note: As a result of the year 2000 Census count, California
DoF is revising its annual population estimates for the last ten
years. Until the revised data is received, we are using the
earlier data.
Assess value after slow growth and a decline in 1997 has
finally increased by about 4-5 % each year for 1998 and 1999.
In year 2000 growth of 10% was achieved.
27 September 2001
LONG RANGE PLAH
This page is intentionally left blank.
September 2001 28
2001
Long Range Financial Plan
Chapter 4
CHAPTER FOUR
REVENUE ENHANCEMENTS
AND IMPACTS ON RESIDENTS
With approval of the "$22 million solution," the
City can now consider asking the voters to
approve new revenue sources for capital and oper-
ational needs. Several of the potential new
sources would have minimal to no impact on resi-
dents, while others such as the Parcel Tax will
have an impact.
REVENUE ENHANCEMENTS
The City is investigating the following revenue
enhancements:
¯ requesting voter approval of a Parcel Tax to
pay for the Library Plan
¯ exploring the potential for increasing the
Transient Occupancy Tax and implementing
a Business License Tax
¯implementing development impact fees
¯seeking additional grants from the State and
Federal governments
¯ creating a Redevelopment Agency (approved
by Council)
The City will be conducting a voter survey in Fall
2001 to determine the community’s new or
expanded infrastructure priorities and to deter-
mine its willingness to pay for them. In addition,
the City Manager will be conducting a series of
outreach meetings to discuss the survey’s results,
report on the City’s infrastructure plan, and deter-
mine residents’ top program priorities. This chap-
ter explores potential revenue enhancements that
could be used to fund those priorities. Toward the
end of the chapter, a discussion of current and
potential tax burdens that would be borne by resi-
dents is presented for Council information.
Parcel Tax: In order to expand or build new
library facilities and staff those facilities, the City
needs a new revenue source. As shown in the
"most-likely" forecast, there are not sufficient
funds available to debt finance a major capital
effort or to pay for additional staffing costs. One
financing mechanism used by many communities
to support libraries is a parcel tax. Supporters of
the Library Plan are willing to champion such a
tax. Parcel taxes are flat taxes (i.e. same tax for
each parcel despite size of parcel or ability of
property owner to pay tax) that are levied on all
property owners within the City. This tax would
be considered a special tax and under Proposition
218 would require two-thirds approval by the
City’s voters. Parcel taxes can be used for capital
and maintenance needs.
While the costs of the Library Plan are unknown
at this time, a rough estimate of the potential
impact on property owners can be provided. By
assuming a $50 million project financed over 30
years at a conservative 6 percent interest rate,
each of the City’s parcel owners would be taxed
around $200 annually. If annual operating costs
of around $2.0 million were added, the cost per
parcel would rise by $100 for a total of around
$300. To assess the impact of this estimate on
property owners, Attachment E at the end of this
chapter shows the current taxes borne by resi-
29 September 2001
LONG RANGE PLAN
dents. At this time, it is anticipated that a parcel
tax would be brought for voter approval in
November 2002.
Transient Occupancy Tax (TOT): An increase in
the TOT from 10 to 13 percent was originally pro-
posed by staff to fund part of the City’s $100 mil-
lion Infrastructure Management Plan. Following
Council’s direction, staff explored this option with
the City’s Chamber of Commerce. Of the numer-
ous concerns expressed by the Chamber, the pri-
mary ones were that residents were not bearing
their fair share of infrastructure improvement
costs and that hotel owners would suffer a drop in
occupancy rates due to higher prices.
During the recent community dialogues, residents
appeared to favor an increase in the TOT and
implementation of a Business License Tax (BLT).
A TOT would principally affect non-residents vis-
iting the City. In staff’s opinion, this is a pass
through tax that is not borne by hotel owners.
Hotel owners argue that this tax, however, reduces
hotel stays, dampens job growth, and lowers City
sales taxes. Staff believes that there is room for a
TOT increase and that an increase will not appre-
ciably affect hotel business in the City. Staff does
not recommend, however, an increase in the ToT
until the current economic environment improves.
It is estimated that a 2 percent increase in the TOT
tax would raise revenues by around $1.8 million.
Business License Tax (BLT): Based on Council
direction, staff has been exploring revenue oppor-
tunities provided by a BLT. A separate, more
detailed City Manager Report discussing a variety
of implementation methodologies and revenue
levels will be provided to the Finance Committee
in the Fall 2001. Staff’s findings also will be
shared with the business community to obtain
their input. Theoretically, a BLT can be designed
to reach any reasonable revenue goal. Staff will
present options that can range annually from $2 to
$10 million.
It is important to remember that early discussions
with the Chamber (1998-99) focused on a Busi-
ness Registry Fee program. The fee would have
acted as an information tool to determine the num-
ber and type of businesses for which the Chamber
and City have little data. The nominal fee was
meant solely to cover the costs of administering
the program. Since that time, a BLT has been
raised at the community dialogues as a means for
raising revenues for new infrastructure projects
and citizens appear to be supportive.
Palo Alto is one of a few cities in California with-
out a BLT, a tax most businesses expect to pay
when relocating to the City. A concern expressed
by citizens .at Council meetings and during the
community dialogues is that some businesses,
especially those providing professional services
(e.g. law and fmancial firms) may not be contrib-
uting their fair share toward City services. Since
no sales tax is garnered from these businesses, a
BLT could be developed to more equitably distrib-
ute tax burdens throughout the business commu-
nity. Moreover, with the recent conversion of
retail to office space, a BLT may be needed to off-
set the loss of sales tax revenues discussed above.
September 2001 30
A new BLT and an increase in the TOT would
have to be approved by a majority of Palo Alto
voters. These taxes would be considered gen-
eral taxes for all General Fund purposes.
Should the community and Council want to
move forward with these revenue enhancements,
staff would recommend that they be placed on
the November 2003 ballot.
Development Impact Fees: At a July 17, 2000,
Council Study Session, Council requested that
staff investigate the feasibility of and propose
new development impact fees. New fees were
discussed within the context of fmding new rev-
enue sources to address new programmatic
needs, to fully fund the Infrastructure Manage-
ment Program, and to fund new facilities.
A development impact fee is a fee charged to
pay for measures to alleviate the impact of new
developments. The City can use such fees to
finance the incremental cost of improvements to
public facilities and services necessitated by
these new developments. The City of Palo Alto
already has a number of development impact
fees in place. These include, for example, traffic
impact fees in the Stanford Research Park area
and housing impact fees for commercial and res-
idential projects of three or more units.
Based upon Council’s direction, staff is currently
evaluating impact fees for parks and community
facilities and the feasibility of impact fees for
public safety. Additionally, staff will examine
existing impact fee levels and structures to
determine if expansion of those fees would be
warranted. Additional impact fees requiring
extensive evaluation and a nexus study, such as
those for transportation improvements and traf-
fic calming measures, would be included in a
subsequent study, should the City decide to pur-
sue impact fees further.
Working with an expert in development impact
fees, staff has been completing a nexus analysis
to demonstrate the impacts that new develop-
ment has on City2provided services. Specific
areas of study include Palo Alto libraries, parks
and community centers. The study documents
existing City facilities, levels of service, facility
costs, measures of impact, and potential fee cal-
culations. Staff plans to present the nexus study
and recommendations to the Finance Committee
on October 16, 2001. Potential revenues pro-
vided by development impact fees will be deter-
mined by the fee levels adopted by the City
Council. A conservative and preliminary esti-
mate shows potential Phase I fees generating
$275,000 annually. Other impact fees will be
investigated in 2001-02.
IMPACT OF REVENUE ENHANCEMENTS ON
RESIDENTS
A frequently asked question.by Council is what
taxes residents are currently beating and what
will be the effect of new taxes. To answer this
question and to clarify what taxes paid by resi-
dents go to the City, staff has prepared an analy-
sis of an "average" homeowner in Palo Alto.
The analysis is provided to guide Council in its
policy decisions and to inform the community
31 September 2001
LONG RANGE PLAN
about how their taxes are distributed among gov-
ernment entities. Most importantly, this analysis
will lead to an understanding and a rational public
discourse on the resources the City receives and
the services it provides to its citizens.
Household Gross Income $ 107,100
Adjustments to Income $ 2,500
Adjusted Income $ 104,600
Exemptions (3 household
members @$2800 each)$8,400
Deductions $31,317
Federal Taxable Income $64,883
FEDERAL INCOME TAX $12,467
SOCIAL SECURITY TAX $5,829
State Taxable Income $77,000
STATE INCOME TAX $3,416
STATE DISABILITY INSURANCE $301
GASOLINE TAX $396
SALES TAX $1,590
PROPERTY TAX $7,065
MOTOR VEHICLE LICENSE FEE $288
UTILITY USERS TAX $ 150
TOTAL TAXES PAID $ 31,502
Note: See Appendix AX for detailed assumptions regarding the
above calct~lations.
Palo Alto
is a service
rich City.
In 1998,
staff con-
ducted a
survey of
12 Califor-
nia cities
of compa-
rable size
to Palo
Alto.
They
found
(CMR
158:98)
that Palo
Alto spent
$1,392 per
capita on its operating budget (excludes capital
programs), or 66 percent more than the average of
cities surveyed. The next highest city after Palo
Alto was Santa Monica at $1,197 per capita.
This survey showed that in !998 Palo Alto spent
$553 more per person than the average city of its
size, on such services as fire, police, parks and
recreation, and public works. In the last few years
per capita spending has risen to $1,836 per capita
as citizens have requested and been granted pro-
gram enhancements such as:
¯Additional staffing for the Children’s Theatre
¯Community oriented policing
¯Emergency preparedness program
¯New staffing and support for the libraries
¯ Enhanced traffic enforcement and downtown
patrols
¯Free shuttle
¯Additional planning staff
¯Golf Course improvements
¯Technology Improvements
When we take a look at taxes paid by a sample
household (table to the left) in Palo Alto, and the
proportion of those taxes the City receives, we see
that the City must make do with relatively low tax
revenues from its residents. What the individual
household pays to the City (see graph on next
~.Taxes Paid by Family with $107,000
Income - Year 2000
58.7%
Federal
Taxes
$18,496
28%
$8,805
13.3%
$4,201
September 2001 32
LONG RANGE PLAN
page) is a small percentage of what it pays in taxes
to the federal, state and county governments and to
the school district. This tax analysis of an "aver-
age" Palo Alto family (3 household members)
with a gross income of $107,000 and a home with
an assessed value of approximately $625,000 is
offered to illustrate this point.
The pie chart on the prior page shows the breakout
of taxes paid: 72 percent of the household’s taxes
flow to the state and federal governments while 28
percent flows to local jurisdictions such as the
county, school district and City. Of the 28 percent
of the total taxes that are paid locally, only 3.3 per-
cent flows to the City of Palo Alto. Without down-
playing the significant amount paid in total taxes
paid by this household - 29.4 percent or $31,502
of its gross income - this analysis shows a contri-
bution of $1,048 in taxes in return for City pro-
gram and service benefits costing around $1,836
per capita. It is important to note that this analysis
includes not only property taxes, but also other
local taxes such as sales, utility users, motor vehi-
cle, and gasoline taxes as well.
From the federal and state governments, to which
the household paid $23,208 last year, its members
will receive, for example:
¯ environmental protection through federal and
state laws and programs that preserve the
quality of the air they breathe and the water
they drink
¯ a sense of security knowing there is a national
military to protect the country from foreign
aggressors
¯ the comfort that if they are involved in a legal
matter, there exist state and federal courts in
which to present their legal interests
¯ a well maintained freeway system
¯ state and federal dollars which support their
child,s school
¯ knowledge that their bank savings are insured
by the FDIC
In addition, a household may receive veterans or
social security benefits, which help them pay the
medical or food bills (although our sample house-
hold did not receive social security benefits in
2000).
Let’s translate these dollar fig-
ures to real life examples. With
all these tax dollars flowing
from this sample household,
what are its members receiving
on a day-to-day-basis-in return
for their financial contributions?
Fedor~
$18,496
State iWho Getsthe Local Dollars?i
Local
$8294
County~ $& 844
Schools
$3,787
Other
$615
[]Federal
¯State
[]County
[]Schools
[] Other
33 September 2001
LONG RANGE PLAN
From the City, to which this household contrib-
uted $1,048 in 2000, its members will receive the
following benefits, among others:
The pie chart below and corresonding table show
how the City spends the "average" family’s tax
dollars.
¯ the knowledge that if there is a medical emer-
gency on any given night, they can get quick
access to paramedic services
¯ during summer, three different free concerts to
choose from in a given week
¯ six neighborhood libraries
¯ eightfire stations
¯ a well maintained athleticfieldfor the child’s
soccer games
¯ sidewalks maintained in safe condition
¯ neighborhood safety thanks to the Police
Department and community policing efforts
¯ Children’s and Community Theatre perfor-
mances
¯ Free shuttles
$116
Human
Resources,
Finance,
Technology
11%
$146
Fire
14%
How the City Spends
ithe Family’s Tax Dollars i
$63
PAUSD
$114 Financial
Public Works -~Support
11%\6%
$63
Planning &
f Transportation
6%$63
Capital
$178
Police
17%
6%
$52
Administrative
Support
5%
$41$210 OtherCommunity4%Services
20%
I
3320 acres of parks and mini-parks
Community Library system with six neighborhood
facilities
Children’s Theatre and Zoo
Art Centre with over 150 classes per year
Community Centers
Support for the activities, classes, and services such as
free legal assistance and the nutrition program at the
Senior Center of Palo Alto
Swimming pools
Summer day camps, including sports camps, science
camps, nature camps and pre-school camps
Summer concert series
POLICE / FIRE I
24-hour Police and Fire/paramedic protection
8 Fire Stations
Animal Services
Downtown Police patrols
Disaster preparedness training program
PUBLIC WORKS ]
Streets and sidewalk repairs
Seismic work on public buildings
Renovation of public facilities
Design and construction of city parking structures
PLANNING & TRANSPORTATION I
Free local shuttle
Building permit processing
ADMINISTRATIVE SUPPORT
City Manager, City Attorney, City Clerk, City Auditor,
City Council
September 2001 34
LONG RANGE PLAH
SUMMARY
In summary, the city benefits are likely to have a greater day-to-day impact on the household, for
much less money, than the federal and state benefits. Yet the city must make efficient use of scarce
resources in delivering these benefits. It has a reasonable challenge in maintaining existing ser-
vices with the resources currently at its command. For new programs and projects, such as expan-
sion of the libraries or building other new facilities, the City must find new sources of revenue.
The final piece of information Council has requested in the past is a picture of the annual tax bur-
den that property owners within the City bear. A profile of our sample household’s current tax bill
for 2000-01 is presented on the next page. Any incremental taxes, such as a parcel tax for the
Library Plan, must be added to the total bill of $7,065 to their impact.
This comprehensive profile shows the source and amount of each local jurisdiction’s tax and the
amount the City receives. Of $7,065 in taxes the property owner pays, the City receives around
$596. This information is provided to allow informed policy and taxing decisions as the City
moves forward with expensive, new projects such as the Library Plan that will require new taxes.
35 September 2001
LONG RANGE PLAH
Attachment E
Assessed Value of
Home:
Source of Taxes:
1 Percent Property Tax 6,030
County Retirement Levy 215
Palo Alto
Elementary/Unified School
Bonds 450
Parcel Tax - PAUSD 0
County Water District 84
Community College Dist.0
Vector Abatement 5
Homeowner Exemption*-79
Total on Property Tax
Jse of Taxes:
State
County 2,084
PAUSD 3.646
Cit~ (of Palo Alto)572
Community College
SCVWD (Water)232
Vector 5
Other 167
iTotal on Property Tax
IBUl $6,705
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
$603,037 $615,098 $627,400 $639,948 $652,747 $665,802
$6,706
0%
31%
54%
9%
O%
3%
O%
2%
100%
6,151
219
459
0
84
0
5
-79
$6,840
0
2,126
3,720
584
0
235
5
170
$6,840
6,274
223
469
0
85
88
5
-79
$7,065
$0 o%
2169 131%
3795 !54o/o
596 8%
88 1%
239 3%
5 O%
174 2%
$7,065 100%
6,399 6,527
228 232
478 488
293 293
86 87
74 75
5 5
-79 -79
$7,484 $7,628
0 0
2,213 2,258
4,165 4,243
608 620
74 75
243 247
5 5
177 181
$7,484 $7,628
6,658
237
497
293
87
77
5
-79
$7,776
0
2,303
4,323
632
77
251
5
184
$7,776
September 2001
LONG RANGE PLAN
Attachment F 1
13-
Employees Per One Thousand Residents
12-
11
1995 1996 1997 1998 1999 2000 2001
Attachment G I
GF Revenues & Expenditures Per Capita in 1999 Constant Dollars
1800
1600
1400
1200
1995 1996 1997 1998 1999 2000
i--O--Revenues~Expenditures!
2001
37 September 2001
LONG RANGE PLAN
400
350
300
250
200
150
100
5O
0
I Attachment H i
Selected Revenues Per Capita in 1999 Constant Dollars
1995 1996 1997 1998 1999 2000
[~Sales --e--Property -=I:~UUT --O--TOT i
2001
September 2001 38
Attachment I
Federal Exemptions
Each exemption worth
State Exemptions
Personal
Child
*Deductions:
Mortgage interest
State taxes paid
SDI
Gasoline taxes
Charity
3
2800
150
235
$26,60C
$3,41~
$301
$1,00C
ASSUMPTIONS:
Year House Purchased
Original House price
Assessea t-lome va~ue ~n zuuu
Length of Mortgage
~o aown payment
Interest rate on mortgage
Current (tax) year
Household: married couple with one child
Family owns home
$3000 utility bill/year
Car purchased new @ $20,000, 5 years old
Current value of vehicle
2nd car purchased used @8000, 1 year ago
~Jurrent value Of car ~z:
No person in family is self-employed
Family has no dividend income
Gasoline purchased/year
Average price/gal gasoline
1994
;~bZb,UUU
~u years
,";J/O
f,Zb~/o
ZUUU
~1 Z,UU~
Sales taxable items purchased at 18% of gross income (see BLS stats)
Notes:
Certain tax changes have occurred since this case year 2000:
Sales tax has come down from 8.25% to 8.00%
Motor Vehicle license fee, then at a 25% rebate, is at a 67% rebate
39 September 2001
LONG RANGE PLAN
This page is intentionally left blank.
September 2001 40